達美樂 (DPZ) 2011 Q4 法說會逐字稿

Good morning, and welcome to the fourth-quarter and full-year earnings results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer session.

(Operator Instructions).

Thank you, Lynn Liddle with Investor Relations.

You may begin your conference.

Thanks, Amber.

Appreciate it.

Welcome, everybody, this morning.

A couple of housekeeping notes.

In the event that we do have any forward-looking statements, I will turn your attention to our safe harbor statement, which is listed on both 8-Ks.

And then, also, to members of the media -- please, listen-only mode this morning.

And we are going to do our usual start, with Michael Lawton, our Chief Financial Officer; and then turn it over to Patrick Doyle, our CEO, and then follow up with some questions.

So, with that, I will turn it right over to Mike.

Thanks, Lynn, and good morning, everyone.

Before I discuss the results for the fourth quarter, I would like to make a brief comment on our announcement today regarding the proposed refinancing of our existing debt.

As you can see in the press release we issued today, we have announced the intention to engage in the refinancing of our existing securitized debt with a new securitized debt facility.

Due to Securities Law restrictions, will not be discussing the refinancing or answering questions regarding it on the call today.

And our Investor Relations team will be implementing a quiet period until the transaction closes.

All of your questions regarding the refinancing will be answered after the closing, when we plan to hold another conference call.

We appreciate your respecting these guidelines in the Q&A session.

So now let's dive into our fourth-quarter results.

The fourth quarter was another outstanding period, as we posted solid domestic and international same-store sales growth and continued strong international store growth.

We used our cash to benefit our shareholders through our share repurchase program, and continued to drive shareholder value, with 30% adjusted EPS growth in the quarter.

Now let's look at our system revenue for the quarter.

Our global retail sales, which are the total retail sales at franchise and Company-owned stores worldwide, grew 9.9% during the quarter, excluding the impact of foreign currency.

When including the negative currency impact, our global retail sales grew 8.8%.

Looking at the drivers of the global retail sales growth -- first, our domestic same-store sales grew 6.8% in the fourth quarter, lapping into a strong quarter in 2010, when we were up 6.3%.

This yielded a very strong 13.1% two-year sales comp for the quarter.

Broken down, franchise same-store sales were up 6.6% for the quarter, while Company-owned stores were up 8.7%.

International had another solid quarter as same-store sales grew 4.7%, which was lapping the strongest quarter in 2010 when we were up 9%.

This resulted in a 13.7% two-year sales comp for the quarter.

In the quarter, we opened 16 net stores domestically, made up of 33 store openings and 17 closures.

We remain very focused on achieving store growth domestically.

Our international division grew by a net 185 stores this quarter.

Turning to revenues, our total revenues for the fourth quarter were up almost $22 million, or 4.5% from the prior-year quarter.

Approximately $18 million, or 81% of the total revenue increase, was attributable to our supply-chain division.

Largely due to higher commodity costs versus the prior year quarter.

We also benefited from higher domestic franchise revenues, due primarily to higher same-store sales.

Further, higher international revenues resulting primarily from same-store sales of store comp growth, contributed to the overall revenue increase.

The increase in international revenues was partially offset by negative impact of currency changes.

During the fourth quarter, of approximately $1 million.

Looking ahead at 2012, we currently expect the dollar to be stronger than last year, which would negatively impact our international revenues.

Partially offsetting 2011 revenue increases were lower Company-owned stores revenues, resulting from the sale of 58 Company-owned stores during 2011.

More detail regarding our revenue by business unit can be found in our 10-K, which was filed this morning.

Moving onto operating margin -- as a percentage of revenues, our consolidated operating margin increased .5%, from 28.4% to 28.9% quarter over quarter.

This was due primarily to a change in our mix of revenues attributable to fewer Company-owned stores and increased high-margin franchise revenues.

We also experienced an increase in Company-owned store operating margin.

These increases were offset in part by a lower supply-chain margin percentage, which was impacted by higher commodity prices.

As a percentage of revenues, our Company-owned store operating margin increased 2% from the prior-year quarter, in part due to a reduction in labor hours per transaction versus the prior-year quarter, which we attribute in part to growth of our carryout business and an increase in online transactions.

Now let's move on to our supply-chain margin, which decreased .4% from the prior-year quarter, primarily due to the impact of higher commodity cost.

With food commodities priced on a constant dollar markup to our franchisees, increases in commodity cost do not impact our supply-chain dollar profit.

They do, however, negatively impact our supply-chain margin as a percentage of revenues.

Our top commodities, including cheese, increased versus the prior-year quarter.

The average cheese block price in the fourth quarter was $1.76 per pound, versus $1.61 last year, which drove a 6% increase in our market basket in the fourth quarter.

Our market basket for the full year 2011 was also up approximately 6%.

Our expectation for 2012 is that the growth in our market basket will moderate somewhat and increase 1% to 2% over 2011 levels.

Turning to G&A expenses -- G&A was flat during the fourth quarter versus the prior-year quarter.

Lower variable performance-based bonuses and lower expenses resulting from the sale of the Company-owned store operations in 2011 were offset, in part, by higher expenses for online ordering and a call center, which are services we provide to our franchisees.

Our G&A for the full-year 2011 was $211.4 million.

In 2012, we expect an additional $8 million to $10 million in incremental G&A from the 2011 reported levels.

Keep in mind that our 2011 G&A expense includes $2.2 million of gains on certain Company-owned operations.

So if you exclude these gains, we expect G&A to be up $6 million to $8 million.

The increases are for international infrastructure growth, investments in technology, higher stock compensation expense, and other strategic initiatives, offset in part by lower variable performance-based bonuses.

We expect to have significant paybacks, as these investments are critical to support the future growth of our global business.

Keep in mind that G&A expense can vary up or down -- by, among other things, our performance versus plan, as that affects bonus and stock awards expense.

Regarding income taxes, during the fourth quarter we had a slightly lower effective tax rate versus the prior year quarter, due primarily to the laps of federal and state statutes of limitations, which also contributed to our full-year effective rate being slightly lower than 38%.

We currently expect that 38% to 39% will be our normalized effective tax rate for the foreseeable future.

Our net income as reported was up $6.7 million, or $27.9 million for the fourth quarter.

This increase was primarily the result of our strong domestic and international same-store sales growth; record international store growth; and lower interest expense in 2011.

Now our fourth quarter diluted EPS, as reported on a GAAP basis, was $0.52 and we had no items affecting comparability in the quarter.

The $0.52 is a $0.12 or 30% increase from the $0.40, as adjusted EPS in the fourth quarter of last year.

Here is how the $0.12 difference breaks down.

Our improved operating results benefited us by $0.09 in the quarter.

Our lower diluted share count, primarily due to our share repurchases, benefited us by $0.02.

And our lower interest expense benefited us by $0.01.

Now turning to our liquidity -- free cash flow continued to grow from almost $103 million in 2010 to nearly $129 million in 2011.

In the fourth quarter we utilized some of our available cash to repurchase and retire approximately 1.1 billion shares of our common stock for $35.8 million, or an average price of $31.25 per share.

For the full-year 2011, we repurchased and retired approximately 6.4 million shares of our common stock for $165 million, or an average price of $25.72 per share.

We currently have $82.4 million remaining authorized under our open market share repurchase program for future share repurchases.

And we ended the year with over $50 million on restricted cash.

Turning to our capital expenditures -- in 2011 we invested over $24 million in capital expenditures in our stores, supply-chain centers, and technology initiatives.

Going forward, we have raised our long-range outlook on capital spending to approximately $25 to $35 million annually, as we will invest capital into technology, supply chain, and Company-owned stores.

In closing, our strong fourth quarter contributed to an outstanding 2011.

During 2011, our domestic same-store sales grew 3.5%, and our international same-store sales grew 6.8%.

The Company grew by a net 391 stores, which is a result of the record performance by our international division, which opened 413 net units for the year.

As a result, we had adjusted EPS growth of 25% for the full year.

Our focus remains on improving our operating performance, growing our global store base, and appropriate utilization of our free cash flow to drive shareholder value.

Thanks for your time today.

And now, I will turn it over to Patrick.

Thanks, Mike.

Last year during this time, I told you that we faced a big task in 2011, to exceed our 2010 results, but that we had a strategic plan in place that our team could execute.

I reminded you that we built a new sales base to grow from, and we had a new level of customer loyalty in the US.

And we built some very strong brand equity around the world.

I said that we expected continued growth in 2011, and I am happy to report that we had a great year.

We ended it with a positive annual sales domestically and internationally, exceptional global store growth, and overall positive results.

We are not the same company we were even two years ago.

We really are a different Domino's.

Domestically, we had higher levels of consumer engagement online, and we upgraded our food quality versus the past.

We strategically launched three new products last year -- improved chicken, Artisan pizzas, and Stuffed Cheesy Bread, which together brought our overall food quality even higher.

In the US, we lapped our 2010 plus-9.9% annual sales comp with a 3.5% increase this year.

We opened more new stores internationally than ever before, and we are one of the top-performing stocks in the restaurant industry, up 113%.

Our excellent results in 2011 came not only from our tremendous international sales momentum or our strong domestic sales and higher level of consumer engagement, but also from our technology.

For example, Domino's Pizza in the US processed over 1 million orders during the week of Cyber Monday alone, our best week of digital sales ever to that point.

In fact, we estimate that we did over $1.8 billion in online sales globally in 2011, or about $34 million a week around the world.

We are also very active in social media.

In the US we have grown by 400% in the past 12 months in both Facebook and Twitter followers.

In the fourth quarter we created the first ever global Domino's Day on Facebook, with 20 countries participating in the event, spanning 14 different languages.

This resulted in a record day for Domino's Pizza online sales.

In June of last year, we launched our iPhone app, which in just six short months has driven our mobile sales to over 6% of sales.

I am happy to report that we also recently launched an Android app, which should help drive these sales even higher, and now enables us to cover more than 80% of smartphones.

Meanwhile, digital orders are now about a third of our domestic sales overall, and continue to grow at a steady clip.

Our technological advantage is truly global, with online sales in Japan now roughly 50% of their total orders, and 50% of delivery orders in the UK.

We believe that we are a truly innovative brand, with industry-leading digital promotions that truly offer one-to-one marketing to our consumers.

This is an advantage that few of our competitors can claim, particularly smaller regional chains.

You probably saw our announcement yesterday that we named a new Chief Information Officer, Kevin Vasconi, who comes to us from Stanley Black & Decker -- the Security Solutions division, where it he was Chief Information Officer and Vice President of Engineering.

Prior to that, he spent eight years at R.L.

Polk & Company as Senior Vice President and Chief Information Officer of Polk Global Automotive.

Kevin has lots of consumer experience and has built great technology platforms throughout his career.

He is a great leader, and we are looking forward to having him on the team.

It is an important position, given how technology is so pivotal to our business today.

I would also like to thank Mike Lawton for his service as interim Chief Information Officer, and, especially, for the team's hard work in getting our new Android app out.

Mike has been doing double duty lately.

And the new app was an important undertaking on top of his very busy schedule as CFO.

Thanks, Mike.

We are very proud of what we did in 2011, and it was an important year for us.

We had strong momentum going with all of our initiatives in 2011 but one -- domestic store growth.

We expected to see better domestic store growth numbers in 2011, based on the good year our operators had in 2010.

However, we experienced spikes in commodity prices in 2011, which eroded store margins during the summer and made franchisees more hesitant to expand.

What we know is this -- the best way to develop new stores is make unit economics robust and profits so compelling that franchisees want to grow in a meaningful way.

So this is where our team is the most focused -- identifying cost saving opportunities and better efficiencies, so our franchisees can generate better profits.

The franchisees are ultimately responsible for their own profitability, but we are committed to finding ways to help them perform better.

Additionally, strong franchise owners have been able to acquire stores from weaker operators for much of their store growth needs, as opposed to building new stores.

The program we announced in 2008 to remove weak operators and move underperforming stores into the hands of stronger franchise owners has definitely improve the strength of our system.

We remain committed to this program, and as the franchisees have gotten stronger, and weaker franchisees have been removed, the opportunity for growth from strong operators will increasingly have to come from building new stores.

We have also made some changes internally, moving some strong leaders in the Company into roles that we believe will help drive better results in domestic store growth going forward.

Our goal, as always, is for positive store growth in 2012.

On the international front, our store growth picture is very robust, and stronger than our competitors.

So much so, that we recently increased our long-range outlook for global net units -- now expected to be 350 to 450 global net new units per year, up 100 to 150 net new units from our previous outlook.

We also recently increased our outlook for international same-store sales, from our previous range of plus 3% to plus 5% to an expanded range of 3% to 6%.

We you combine this new international same-store sales number with an increased number of new global stores, our global retail sales expectations also climb, to 5% to 8% annually.

As one of the top public international restaurant brands, Domino's Pizza benefits from scale, but also with long runway for growth.

In the pizza delivery and carry out segment internationally, according to third-party and internal data, we are about 1.5 times bigger than our nearest competitor, but with significant growth opportunities, since we only have an estimated 11% market share internationally in off-premise pizza.

So while we have still got new markets to open, we also have significant growth left in the countries where we already compete.

In fact, existing markets will generate the vast majority of our growth during the next few years.

For instance, during 2011 we opened 54 net new stores in the UK; 58 net new stores in Turkey; and 75 net new stores in India, our fastest-growing market.

We also had some noteworthy international store opening milestones during 2011, including our 400th store in India and our 200th store in both Japan and in Turkey.

We are proud of everything our international master franchisees accomplished worldwide last year.

And we look forward to strengthening the business in 2012, as the international division is a very big part of the equation that is DPZ.

Lastly, I would like to say a few words about our balance sheet.

As Mike mentioned, due to legalities surrounding our recapitalization that is in progress, I am unable to speak specifically about the refinancing.

And we will be an able to take questions on our debt at the conclusion of my comments.

But, from a 30,000 foot view, we have taken our debt from $1.7 billion in 2007 to 1.45 billion at the end of 2011.

And our debt-to-EBITDA ratio was 4.9 times at year end.

As I have said many times, this is a company that best operates with leverage.

As in years past, we expect to generate strong free cash flow again in 2012 because of our franchise model.

As it relates to how we deploy that free cash, our goal is always to strengthen the business and benefit our investors in ways that create the best shareholder value.

So, in closing, Domino's Pizza had a tremendous 2011.

We followed a successful year with another successful year.

Our achievement is part of larger strategy that we began crafting and executing in 2009.

It was not a phenomenon that ended with the launch of our new pizza.

It is a strategy of great food, continued service excellence, technological advantage, and a global franchise model that sets our brand apart.

With that, Amber, I would like to open the line for questions.

(Operator Instructions) Brian Bittner, Oppenheimer.

Thank you very much.

Congratulations on a great quarter.

Thanks, Brian.

I've just got two questions on the domestic business, and then just a quick follow-up, if I may.

Just wondering if you can elaborate on how the rollout of new product in the fourth quarter, such as Artisan and the Cheesy Bread, intakes your comp momentum versus how well the core products performed.

It is hard to really pull that apart.

I guess what I would say -- because, obviously, it is all happening at the same time -- but I guess what I would say is, the new products certainly helped.

You know, we were rolling over a little bit easier comp in the fourth quarter of 2010.

So if you look at our two-year comp number for the fourth quarter, it was pretty much in line with what we have been doing on a two-year comp over the course of the year.

The new products performed very well.

We are very pleased with both of them.

But the more important story continues to be higher levels of retention and customer satisfaction and frequency from customers, which is really that new base of business that we have been talking about.

Got it.

And the second question on these comps is -- you know, the gap between the Company-owned and franchise comp -- I know it's been asked before.

But it is still pretty large.

And just wondering if this has anything to do with Company-owned stores being test markets and, therefore, possibly being a forward indicator of the franchise comp?

Or, really, do you think it is just a geographic impact?

Or are you guys just better managing those Company-owned stores?

First of all, if you look at the fourth-quarter 2010 number, it was actually, I think, a point the other way.

So franchisees beat Team USA by about a percentage.

So, partly, you've just got a little bit of a flip-flop going on, quarter over quarter over the years.

But I wouldn't read a lot into it.

We are very happy with how the team is running the corporate stores.

But if you look at it on a longer-term view, I think the answer is both sides are doing very, very well.

And I don't know that I would read a lot into the specifics of the Team USA versus the franchise stores.

Okay.

and then just a last question.

I mean, rather than ask anything about the debt, just wondering if you could elaborate on really how you decide whether to use excess cash that you have for special dividends or share repurchases, as far as that value creation equation.

I mean, how do you think about that?

Yes I can't really go into that, as you would expect.

I guess what I would say is what we have said before, which is we run the numbers -- I think the same way that our investors do -- and we look for what is going to generate the best return for our shareholders.

And apart from that, until we have gotten through this process, I can't say a lot more.

Okay, thanks a lot.

And congratulations again.

Mitch Speiser, Buckingham Research.

Great, thanks very much.

First, on store margins in the US -- the labor leverage was pretty significant in the quarter.

You did mention carryout and online ordering were a driver of that.

I believe your labor was down 170 bps.

Can you give us a sense of how much that was from the shift to carryout and online ordering?

Yes, it's hard to pull that apart on any kind of a short-term basis.

But I would tell you that we are definitely seeing some of the leverage on labor from both of those, and fourth quarter was better.

I mean even though I talk about the pressure on store-level margins, it was better for our corporate stores.

And fourth quarter was better for our franchisees as well.

Than the first three quarters were.

So, nice forward progress there.

It is a trend that we need to keep going.

But you are right on the labor leverage.

It is definitely there.

We have got a newer, higher level of sales.

The stores, as they are adjusting to that higher level of sales, figure out how to get more efficient over time, as we've kind of settled into that new higher base and continued to grow from it.

But while I can't really give you a specific answer on how much of comes it from just higher sales versus carryout versus online ordering, what I can tell you with confidence is, it's the sum of all three of those.

And it sounds like it should be ongoing, as these percentages continue to rise.

We would certainly hope so.

Okay, great.

Thank you.

And separately, your Chief Marketing Officer has talked about the -- what do you call it?

The french fry factor, adding lower-priced items on to your current marketing programs.

Can you discuss that in a little more detail, and how that is maybe different from the way you've been marketing in the past?

What Russell was talking about on that is, if you look at what generates orders in the hamburger business or in the pizza business, it is kind of the center-of-plate items.

You generate orders by selling more pizzas or sandwiches or pasta.

But you generate orders by selling the main item, but what makes those profits more profitable -- what makes those orders more profitable -- is to get good add-ons to those orders and to have the right selection of those things.

French fries are very profitable for the hamburger companies.

And so, for instance, we kind of soft-launched Parmesan Bread Bites in the fourth quarter.

And we have since launched them in the first quarter, and are out there; it's our current campaign.

And in the fourth quarter we had launched the Stuffed Cheesy Bread.

Great products and very good margins.

So the extent to which we can add those onto the orders, it is going to make each order more profitable.

And some of that plays into the margin gains you saw on the corporate stores side and, as I've talked about, on the franchise side in the fourth quarter.

Great.

And if could slip one more in, this one is probably for Mike.

The international revenues -- I noticed the supply-chain revenues outside the US was down 0.9.

Was there a 4X factor in there?

Or have you done anything different with your distribution centers, perhaps in Canada?

If you can explain the decline in revenues for international supply chain.

Thanks.

Nothing different with the supply chains.

There was certainly a little bit of a currency impact in there.

Joe Buckley, Bank of America Merrill Lynch.

Thank you.

I just had a couple of questions.

First, on the G&A -- Mike, are you still expecting a $2 million to $3 million offset for franchisee contributions for some of the additional services, like the call centers?

Yes we are.

Okay.

And then, secondly, just on international -- and I noticed you have some publicly-traded master franchisees out there -- but can you give us a sense of the relative strength of same-store sales by some of the major markets?

Yes, I guess what I would say, Joe, is it's still very broad.

And if you look at the fourth quarter on a two-year basis, it was exactly equal to the two-year number for the full year for international.

I think it was 13 -- was it 13.7 I believe on a two-year basis, both for the quarter and for the year.

So the answer on it is pretty consistent with what we have been saying for a while, which is even as there are some concerns out there around global economic growth, we just haven't been seeing signs of it.

Except we've clearly felt that a bit in Greece.

But as we look over all of our major markets, and as you've seen, some of them have already released their fourth quarter or second half of the calendar year numbers; they have all continued to hold up quite well.

Okay.

And then just one last one.

With these -- with gas prices rising again, could you remind us where the system is, in terms of delivery surcharges, and whether or not you go into royalty on those if they are implemented?

Yes, we do.

They are part of the sales out of the store.

So we do collect a royalty on that.

And the answer is, typically it's in the $1.75 to $2.00 range per order, is kind of the average on that.

There hasn't been a lot of movement on that.

And I think, giving a little broader answer on it, as we look at gas prices, there are really three ways in which it can affect us.

One is the direct reimbursement to our drivers, or for the franchisees for their drivers.

And that's a direct that will -- that, at some point, you have got to deal with the cost on that.

But on order of magnitude on that, overall is relatively small.

You have got potential changes in consumer behavior.

And our experience with that in the past is that we just don't see that much direct change in consumer behavior -- shifts back or forth between carryout or delivery.

We have scrubbed that data up, down, and sideways and, honestly, just have not seen a whole lot on that front.

The bigger, medium-term to longer-term concern is, does it start to flow through food cost?

Does it start to flow through commodities?

And that is the one that is potentially big enough that it could turn into a headwind, if oil prices continue to move up materially.

But so far, commodities are looking pretty good.

And our outlook is still for pretty modest increases for 2012 over 2011.

That's very helpful.

Thank you.

John Ivankoe, JP Morgan.

Two separate things, if I may.

Firstly, could you discuss or just remind me, in a little bit more detail, what the little bit of the increase in CapEx is?

What type of return that you think you would get from that?

And whether that is the longer-term level, or it migrates back down over time, or possibly even migrates up over time.

No.

It is why we increased our outlook.

We think that's something that we are going to see on an ongoing basis, particularly as we look at technology.

It continues to be a real differentiator for us and for our brand with consumers, and it's an area where we are going to continue to invest going forward.

So that's -- we raised our range for our outlook by $5 million on both top and bottom ends.

And we think that is where it is going to be for the near-term.

And, separately, it -- at least, what I think is deserved confidence, in terms of your consistent free cash flow generation.

Have you thought about maybe pursuing or perhaps even seeding some big markets like China or Brazil for example?

What you maybe co-investing with master franchisees that might potentially exist in those markets.

In other words, does the Company feel -- or does the Company feel like you have an opportunity to actually take more risk in developing markets, in terms of putting some more of your own capital to work?

Yes, I think the answer, John, is the model has worked incredibly well.

We are generating better growth than anybody.

I think our percentage store growth now, going back over the last few years, is better than any of the major international players.

So we love the model.

I would never say never; if we hit a point where we look at a market and say, you know what?

We are convinced that our getting directly involved will make a material difference, we would certainly leave that open as an option.

But as you have seen, to this point, we haven't felt the need to do that or, frankly, seen the opportunity that we think it is going to generate the kind of return that we want.

Understood.

Thank you so much.

Jeffrey Bernstein, Barclays Capital.

Couple of questions.

First, when you look at the US, you talked about the unit pipeline not accelerating in '11, I guess because, in part due to the spike of commodities.

I know you mentioned that you are hopeful for a return to net openings in '12.

I'm just wondering, is that feedback that you are getting from the franchisees, that those shorter-term spikes were the primary drivers?

And just wondering, you talked about initiative to help them perform better that they accelerate their growth.

I'm wondering what that might entail -- whether you ever consider incentivizing US franchisees with some financing help, or a discount to royalty, or [Ed] contributions.

Just trying to size up the reacceleration, cause of the unit growth being more stable and comp growth, longer-term, just trying to size up that US unit growth.

Yes, no, absolutely.

I mean the answer is, we look at all of those things.

But it really comes down to a couple of things.

One is what you mentioned and what I mentioned, which is the spike in the summer in commodities hurt the profits in a near-term basis then, more than we had expected.

We had not forecast the spike to be as big as it was.

And our franchisees are rational about making their investment decisions.

And so, when the near-term profit picture is not as good, then they are going to slow down some of their investments.

That did get better in the fourth quarter, which gives us some more confidence in commodities are, so far, staying pretty well under control in 2012.

But the second part of it is -- and this goes back now, really, four years -- is we decided to focus very hard on improving the overall performance of our system in a number of different ways.

One of which was people who were operating their stores at the level that we thought they needed to be operated at were going to be asked to sell, or in some cases, moved out of the system directly.

And that's resulted in something approaching 200 franchisees leaving the system over the course of the last four years.

And the bulk of those stores, some of them closed back in '09 and '08, but the bulk of those stores have been purchased by the stronger, better franchisees.

And, again, being rational investors, there was a period of time where the best return they could get was to buy some underperforming stores from franchisees who were leaving the system.

As the system is performing better, those sorts of opportunities start to disappear.

And people who want to grow are going to need to build new stores.

So we have got a plan around it, have got the new team working on it, but we think there are a couple of other things that have played into it.

Certainly our goal is to just continue to grow the system going forward, and, certainly, we hope to get back to that.

Okay, but no plans for any help financially to the franchisees to do so.

We have always got some incentives out there.

And those have changed from time to time, but nothing we are going to talk about today.

Okay and then the basket, you talk about the commodities.

And it sounds good that the basket is only going to be up 1 to 2 in '12.

And I'm just wondering what I guess is the cheese assumption, versus the $1.76 in the fourth quarter of '11.

Everything other than cheese, should we assume the majority is locked and, therefore, we are not going to see much movement in that basket?

No.

We are about 25% locked on the basket for the rest of the year.

The assumption on cheese is that we'll average a little bit lower than last year.

And as you can see if you look at the block price today, we are at $1.47, $1.48.

We have already seen the cheese price come down pretty significantly.

We do expect meat prices will run a little higher than last year, but we think that will be offset by the fact that cheese is expected to be lower.

Got it.

Then just, lastly -- it's kind of an anomaly, I guess, for the pizza players -- but we've heard from your restaurant peers that favorable weather has been a big benefit in the first quarter.

I know you don't want to give current quarter trends.

I was wondering if you talk theoretically on the pizza delivery business.

Would that have a negative impact, favorable weather being negative for delivery, I guess?

Or how you think about weather at all in the first quarter of '12 and how that impacts you guys?

Yes, the broad answer is, on a quarter-to-quarter basis, weather moves -- while we've looked at them and analyzed the effects, they may hurt or help you in a short-term basis.

We have never seen big movements on a quarterly basis.

And we do do -- almost 40% of our orders now are carryout.

So there's some offsetting effect on the delivery versus carryout.

Net-net, in the very short-term, two or three inches of snow is a good thing for business.

Big downpours of rain is pretty good for delivery business.

But on a quarterly basis, you're just not going to see that big a move from weather to really adjust it -- to really change the numbers materially.

Yes, well, we are all hoping for some snow.

So, thanks.

Brad Ludington, KeyBanc Capital Markets.

Thank you.

I wanted to ask, on the rollout of the Parmesan Bread Bites, you've been introducing those with a pretty compelling dollar add-on price point.

I think at the Analyst Day, you talked about starting out at $2.99, which, I know they are still on the menu at that price if you don't do it as the add-on to the deal.

Was that dollar add-on the original plan.

Or were you having some trouble rolling those out initially?

What drove that price?

No, that's the trial price.

The goal is to get people to try it and love it, and then you get them to come back.

So, absolutely part of the plan.

Okay, good.

Then, just back on the domestic franchisees and where you talk about opportunities to improve unit economics with them.

Of course, like you said, commodities will help if they come in.

Are there any specific opportunities that you have in mind where you can help them, that you maybe are doing at the Company stores?

Where do you see opportunities to help them on unit economics?

Yes, there are lots of them.

As we look at variability in labor spends, variability and food spends, energy opportunities -- there are just, there are all lot of places.

And we are doing a lot of work.

We have got teams around each of the initiatives.

And some of that ongoing in nature, but we have got some very specific efforts that we are putting together against some of those areas.

And we see some fairly meaningful opportunities.

Okay, good.

Thank you.

Alvin Concepcion, Citi.

Good morning.

You brushed on the topic of consumer behavior earlier, so just wanted to follow up on that.

Did you see any changes in the consumer spending pattern from fourth quarter into January or February?

And on that, are you seeing any mix changes for the value items versus premium?

Can't get into talking about the first quarter, but my answer is, is what it has been in the past, which is employed people buy more pizza than unemployed people.

And net-net, if the economy improves, that is probably a net positive for us.

But I can't get into specifics around the first quarter.

Okay.

And then on menu mix in the fourth quarter, have you seen any changes there, value versus premium?

No.

With the launch of Stuffed Cheesy Bread, we clearly were selling a few more sides in the fourth quarter, but otherwise nothing notable.

Okay.

Great.

Thanks a lot.

Steve Anderson, Miller Tabak.

Good morning.

Just wanted to go -- clarify with you, in terms of the unit growth.

Do you -- have you set a numeric goal for domestic new unit growth as you have for the overseas units?

And can you say -- can you talk about how credit conditions -- if there has been any changes, with regard to the franchisees -- if they have been able to either purchase additional locations or build new ones, as the economy has improved for that in recent months.

Thanks.

The answer is, we have only set a global outlook for store growth.

So we haven't split that apart into international and domestic.

All I would say is similar to what I have said in the past.

It is certainly going to be overwhelmingly around the international side, but we would like to get back to some growth domestically, as well.

And I think the financing market has gotten marginally better.

But it's clearly better for larger franchisees that have potentially bigger needs and longer relationships with the financing companies; still pretty tough for the smaller players.

Okay.

Thank you.

Mark Smith,.

Mike, a quick question.

Your 1% to 2% increase in your commodity basket -- is that including, I guess, what expectation on fuel prices?

There is not a specific expectation on fuel built into commodity.

Obviously, as Patrick mentioned earlier, if fuel was to dramatically spike up at some point, we do think that that passes through the commodities.

So we are expecting that we are not going to see a huge jump in gas price [felt].

Okay.

Second did you guys give your mix on the call center, both on orders as well as how many restaurants are in that?

We haven't.

The majority of our stores are not on the call center.

And most of our call center is really aimed at call overflow.

So, while it is important to us to provide good customer service and reduce the number of calls that are made to stores that ring too many times, this is not a key component to answering most of the order -- or taking most of the orders that go into our system.

And then, lastly, just looking at the tax rate, near-term it looks like you and a lot of your peers are definitely getting some benefit near-term on taxes.

Should we expect that to continue in through the first half of '12?

Excluding your long-term guidance -- near-term, could we see it maybe come in lower?

I think the long-term guidance is still right.

I think you may be referring to the WOTC credits and the HIRE Act, some of the labor credits that are out there.

We certainly are trying to take advantage of those, primarily in our corporate stores.

But we have provided long-term estimates because we think that those are probably the best kind to go with.

Great.

Thanks, guys.

If you can predict the longer-term tax rates at the Federal level, that would be helpful for us.

Peter Saleh, Telsey Advisory Group.

Thank you very much.

Congratulations on a great year.

Just a quick question on the -- actually the iPhone app, and what your expectations are for the Android app.

For the iPhone app, when you launched it last year, did you significant adoption, significant downloads early on?

or was your -- or were your downloads more consistent as we went throughout the year?

And then, I guess, what are your expectations for the Android app?

We saw a continued number of downloads of the iPhone app as the year progressed.

We got off to a good start and it just continued to grow.

We expect that the Android has the potential to actually exceed the iPhone, given that there are more Android users out there.

And so far, we are getting very good customer reviews of the Android app.

Great.

Thank very much.

Jon Tower, Morgan Stanley.

Good morning.

Thanks.

Just a couple of things -- on the incremental CapEx spend, you had mentioned that a good amount of that is going to tech investments.

I was curious to know if that is corporate related, or are you going to push that down to the store level?

Or is there something in the distribution side that you are going to be investing in.

Secondly, seeing that the distribution sales is pretty much the largest part of your overall revenue, is there any opportunities, on the cost side, to make some investments over the next few years to improve margins over time?

The first question -- as far as where we will spend the CapEx -- you have got, within technology, there are a number of areas that we can continue to invest.

We have done a lot with online ordering and with the iPhone and Android, obviously.

There's still a lot going on with the customer interface side that we can do to make it better.

There are going to be more venues that we need to look at and investigate and potentially invest in.

We are also doing funds to improve our proprietary point of sale system.

This affects the store level.

We have a great point of sale system.

We think it gives us some competitive advantages.

But there's still an opportunity to make that better than it is.

As far as improvements in the commissary side, we have fairly large commissaries.

We use -- 17 of them supply the whole country.

We are continually looking for technological advancements.

We have made some over the years in different facilities.

As they are rebuilt, we will continue to look for those opportunities.

But I would not expect to see a particularly meaningful improvement in the margin as a result of those.

Thank you.

And I guess, the only thing I would add on it is, the way we go through our budgeting process every year is -- the first thing we are always looking at is every opportunity to reinvest in the business that is going to generate a good return.

And that is always going to be more interesting than other uses of free cash.

But the net answer is, that gets us into kind of the range that we have been in.

So it is not like we are set in the number and then figuring out what's the best way to spend those dollars.

The answer is, we go out and look at every area that we could be investing into the business that would generate a good return.

And after we have done that, then we start looking at other ways to distribute cash.

Mitch Speiser, Buckingham Research.

On the international comp, which was up 4.7%, it definitely was solid versus a year ago.

You know, we do know what the top franchisees reported?

And if you do a little bit of math, it does -- and correct me if I am wrong, maybe you would like the rest of the world, excluding the big franchisees -- the cut have been down maybe 1% or so.

I guess my question is, was there any areas in the world that were weak, besides Greece in the fourth quarter -- if you can give us a little more comment on that.

We definitely weren't down in the other markets.

And so, no, overall there was pretty broad strength around the world and, so, no.

I mentioned Greece, obviously, because it has been getting a lot of press.

But overall, the answer for the year was good, and pretty broad strength.

Okay thanks.

Next, on US unit growth, as you look at the 2012 pipeline for your US franchisees, do you see an increase in the number of stores?

I believe that about 66 gross were open in 2011.

Just given what you are seeing today, should we expect more in 2012?

I guess all I can say is, our goal is to get back to something at least modestly positive in 2012 on net stores.

And we think the environment is better than it was in 2011, barring big moves in commodities.

But the fact is, if you look at the other side of the equation, which is the availability of stores that are up for sale and/or weaker franchisees looking to move, those numbers have been going down, which means people who want to grow are going to need to look more at opening stores.

Great, thanks.

My last question is just on a dividend.

It has been talked about in prior quarters.

But when you think about a special dividend versus an ongoing dividend, can you give us how you view that difference?

And can a special dividend be followed by an ongoing dividend?

Just any thoughts on how you look at the dividend policy.

Thanks.

I am getting of flag thrown on that question.

I think the answer is, all I can tell you is what I've said before, which is we look at what is going to generate the best returns.

And until we have got this done, saying anything more than that is going to get me in trouble with our general counsel.

Okay.

Fair enough.

Thank you.

I would now like to turn the call back over to Patrick Doyle.

Please go ahead.

So, I want to thank you again for your interest.

It was a terrific year last year.

I appreciate your participating in today's call.

And I look forward to speaking with all of you when we conclude our recap.

Thanks, everybody.

Thank you for participating.

You may now disconnect.